IB Econ Definitions

Absolute advantage

This is where a country is able to produce more output than other countries using the same input of factors of production.

Absolute poverty

Absolute poverty is measured in terms of the basic need for survival. It is the amount of income a person needs to have in order to stay alive.

Actual growth

This occurs when previously unemployed factors of production are brought in to use. It is represented by a movement from a point within a PPC to a new point nearer to the PPC.

Adverse selection

This occurs when a buyer and seller do not have the same information, causing a transaction to take place based upon uneven terms.

Aggregate demand

The total spending in an economy consisting of consumption, investment, government expenditure and net exports.

Aggregate demand curve

A curve showing the relationship between the average price level and real GDP.

Aggregate supply (AS)

The total amount of domestic goods and services supplied by businesses and the government, including both consumer goods and capital goods.

Allocative efficiency

The level of output where marginal cost is equal to average revenue. The firm sells the last unit it produces at the amount that it cost to make it.

Allocative inefficiency

This occurs where the marginal social cost of producing a good is not equal to the marginal social benefit of the good to society.

Anchoring

Anchors are mental reference points, relating to ideas or values, which are used to make decisions.

Anti-monopoly regulation

Policies that are intended to regulate the market share of an individual company in order to enforce competition.

Appreciation

An increase in the value of one currency in terms of another currency in a floating exchange rate system.

Appropriate technology

Technology that caters to the particular economic, social, and environmental characteristics of its users.

Asymmetric information

This is where one party in an economic transaction has access to more or better information than the other party.

Automatic stabilizers

The features of government fiscal policy that automatically counter-balance fluctuations in economic activity.

Average tax rate

The proportion of a person’s income that is paid in tax, usually expressed as a percentage.

Balance of payments

It is a record of the value of all the transactions between the residents of a country with the residents of all other countries over a given period of time.

Balance of trade in goods

A measure of the revenue received from the exports of tangible goods minus the expenditure on the imports of tangible goods.

Balance of trade in services

A measure of the revenue received from the exports of services minus the expenditure on the imports of services.

Behavioural economics

A branch of economic research that adds elements of psychology to traditional models in an attempt to better understand decision-making by economic actors.

Bounded rationality

This suggests that most consumers and businesses do not have enough information to make fully-informed choices.

Budget deficit

A situation that exists when planned government spending exceeds planned government revenue.

Business confidence

An economic indicator that measures the degree of optimism that business managers feel about the state of the economy.

Capital

The factor of production that comes from investment in physical capital and human capital.

Capital account

A measure of the buying and selling of assets between countries.

Capital flight

This occurs when money and other assets flow out of a country to seek a “safe haven” in another country.

Carbon (emissions) taxes

Taxes levied on the carbon contents of fuel.

Central bank

The government’s bank, responsible for an economy’s monetary policy.

Ceteris paribus

A Latin expression meaning 'other things being equal'.

Choice architecture

Choice architecture suggests that the decisions that we make are affected by the layout, sequencing, and range of choices available.

Circular economy

An economic system that aims to redefine growth, focusing on society-wide benefits.

Common access resources

Natural resources over which there is no established private ownership—they are non-excludable, but rivalrous.

Common market

A customs union with common policies on product regulation, and free movement of goods, services, capital, and labour.

Comparative advantage

This is where a country is able to produce a good at a lower opportunity cost of resources than another country.

Competitive supply

This exists where products are produced by the same factors of production, and so compete for these resources for their production.

Complements

Goods that are used in combination with each other.

Consumer confidence

An economic indicator that measures the degree of optimism that consumers feel about the state of the economy.

Consumer price index (CPI)

A measure of the average rate of inflation which calculates the change in the price of a representative basket of goods and services.

Consumer surplus

The additional benefit/utility received by consumers by paying a price that is lower than they are willing to pay.

Consumption (C)

Spending by households on consumer goods and services over a period of time.

Contractionary monetary policy

A monetary policy designed to decrease aggregate demand and thus the level of economic activity.

Corporate social responsibility

An approach taken by firms to produce responsibly towards the community and environment.

Cost-push inflation

Inflation caused by an increase in the costs of production.

Crowding out

A situation where government spending forces up interest rates and crowds out private investment.

Current account

A measure of the flow of funds from trade in goods and services, plus net investment income flows.

Current account deficit

This is where revenue from exports is less than the expenditure on imports.

Current transfers

Recorded in the balance of payments when an economy receives goods or financial items without something in return.

Customs union

An agreement made between countries to trade freely among themselves.

Deflation

A persistent fall in the average level of prices in an economy.

Demand

The willingness and ability of consumers to purchase a quantity of a good or service.

Demand curve

This shows the relationship between the price of a good and the quantity demanded.

Demand management

A policy emphasising the importance of government intervention in managing aggregate demand.

Demerit goods

Goods or services considered harmful that would be over-provided by the market.

Disinflation

A fall in the rate of inflation.

Disposable income

The remaining income available for an individual to spend or save after taxation.

Dumping

Selling a good in another country at a price below its unit cost of production.

Economic development

Involves improvement in standards of living and reduction in poverty.

Economic growth

The growth of the real value of output in an economy over time.

Economically least developed countries (ELDCs)

Countries classified by the UN as being 'low-income countries confronting severe structural impediments to sustainable development.'

Efficient

A quantifiable concept determined by the ratio of useful output to total input.

Elasticity

A measure of the responsiveness of something to a change in one of its determinants.

Equilibrium

A state of rest, self-perpetuating in the absence of any outside disturbance.

Externalities

External costs or benefits to a third party when a good or service is produced or consumed.

Factors of production

The four resources that allow an economy to produce its output: land, labour, capital and entrepreneurship.

Fairtrade

A scheme certifying products from producers in least developed countries to ensure fair pricing.

Financial account

A measure of the net change in foreign ownership of domestic financial assets.

Fiscal policy

A demand-side policy using changes in government spending and/or direct taxation.

Fixed exchange rate

An exchange rate regime where the value of a currency is fixed to another currency.

Floating exchange rate

An exchange rate regime determined solely by the demand for and supply of currency.

Foreign direct investment (FDI)

A long-term investment by a multinational corporation in a foreign country.

Framing

The way that choices are described and presented.

Free trade

International trade that takes place without any barriers.

Frictional unemployment

Equilibrium unemployment that exists when people are in the process of searching for another job.

Government (national) debt

The total outstanding borrowing of a government.

Gross domestic product (GDP)

The total money value of all final goods and services produced in an economy.

Gross national income (GNI)

The total money value of all final goods and services produced in an economy in one year.

Happiness Index

An index measuring collective happiness and well-being of a population.

Households

Groups of individuals in the economy who perform as consumers and providers of factors of production.

Inflation

A sustained increase in the general level of prices and a fall in the value of money.

Inflation rate

The percentage change of a price index over a certain time period.

Investment (I)

The addition of capital stock to the economy.

Joint supply

Goods which are produced together or where the production of one good involves another product.

Labour

The human factor of production including physical and mental contributions to production.

Monetary policy

A demand-side policy using changes in the money supply or interest rates to affect the economy.

Natural rate of unemployment

The unemployment rate consistent with a stable rate of inflation.

Opportunity cost

The next best alternative foregone when an economic decision is made.

Perfect competition

A market structure with many small firms producing identical products.

Price ceiling (maximum price)

A price set below the equilibrium price by an authority.

Production possibility curve (PPC)

A curve showing the maximum combinations of goods that can be produced by an economy.

Public goods

Goods or services which would not be provided by the market due to non-rivalry and non-excludability.

Real GDP

The total money value of final goods and services produced in an economy adjusted for inflation.

Scarcity

The limited availability of economic resources relative to society’s unlimited demand.

Social enterprise

A company operating with the aim of having a social impact rather than maximizing profit.

Substitutes

Goods that can be used in place of each other.

Welfare loss

A loss of economic efficiency when equilibrium for a good or service is not allocatively efficient.

World Trade Organization (WTO)

An international body that sets the rules for global trading and resolves disputes between member countries.